Repairing a car while repairing a credit score

Can a car loan help repair my credit?

It was Einstein that said "adversity introduces us to ourselves," and in that case—as in many others—he was absolutely right. A person's true character cannot be determined without a litmus test (that's the end of the science references, I promise!) that reveals how it holds up in challenging situations. That's when moral convictions and Darwinian instincts (okay, I lied) get their chance to take over and show what people are truly made of if things aren't going their way.

Having bad credit is one of those adverse scenarios that reveal a lot about people. When it happens, are they willing to put in the effort to repair it, or will they just back down from the test?

Why car loans?

There's a lot that goes into repairing a credit score, but one way to score a lot of points in a hurry is to take out a car loan. I know, it sounds counterintuitive (isn't borrowing a whole lot of credit when you're trying to appear financially responsible a bad thing?!?!?!), but it actually does make sense.

One of the things that successful people advise aspiring successful people to do is to fake it until they make it. That isn't to suggest committing fraud or blatantly lying about your situation, but rather, to act like you're in the position you want to be in, and eventually reality will catch up to the fantasy.

With credit, that can be accomplished by taking out a significant loan when you are already in a difficult situation. Doing so bolsters two of the categories that are used to calculate credit scores: credit history and diversity of credit. Car loans especially fit the bill of what that loan should be. They are substantial enough to be taken seriously, and also pretty attainable, whereas a new credit card or mortgage may be more difficult to secure if the person is starting off in a bit of a hole already.

Following through is critical

If you're taking out a car loan in the hopes of repairing credit, then you sure as hell better be ready to follow through with it. Much like a 'double or nothing' roulette bet, this type of car loan is the ultimate boom or bust proposition. The reward is juicy, but the consequences are brutal. There isn't much of a middle ground.

Except unlike a roulette bet, you have all the agency when you take out a car loan. If you fail, there is no one to blame but yourself—certainly not the randomness of probability.

So follow through as best you possibly can. Make all your payments on time. Not some—all. Anything less than that could end up hurting you more than it helps you.

And bear in mind that having a car will bring on a wave of related costs that could make loan payments even more difficult to cover on time. Some of that (gas, maintenance) will depend on how much you're actually driving the car, but insurance and registration can still add up.

Don't get burned on the inquiry

Securing a car loan typically means that people will be looking into your credit history and accessing your credit score. As some people have found out the hard way, that could also mean that they end up affecting those things.

Because of the way credit calculations are done, too many credit inquiries can reflect really badly on a consumer. They often reveal that someone is trying to borrow in a hurry, which demonstrates poor financial responsibility.

However, there are ways to shop for new credit without having it reflect badly on a credit report. One of those ways is to keep the inquiries consistent to one type of credit. If a credit bureau can plainly see that you've only been getting checked by car loaners, then that will look a lot better than people who are clearly trying to get whatever credit they can, as soon as they can. Another is to try and ensure that the companies checking on your history do soft inquiries, not hard inquiries. The former provides a more basic snapshot of a person's financial profile, as opposed to the full-on credit inquiry that a 'hard pull' represents.